Aluminum inventories in warehouses monitored by the London Metal Exchange rose to a record and traders may decide to deliver even more metal.
Stockpiles climbed 0.7 percent to 5.24 million metric tons on gains in Detroit and Baltimore, exchange data showed today. Tomorrow is the so-called monthly prompt date when LME rules oblige holders of contracts to deliver metal or take delivery. Traders with short positions, or bearish bets that oblige deliveries, may choose to release metal rather than renew their wagers and pay the higher cost, according to Societe Generale SA.
“Those trade participants with access to metal, they can deliver,” Robin Bhar, an analyst at Societe Generale in London, said by phone today. “Speculators, investors just have to pay up.”
Aluminum backwardation, when the metal costs more now than later, was the widest in more than five years yesterday. Rolling forward of short positions involves buying metal for nearby delivery and selling it forward. In a market with backwardation, that means traders would have extra costs in rolling forward.
The fee to borrow aluminum for one day, known as the tom-next spread, jumped to as high as $22 a ton on the LME today before easing to $1 a ton by 1:22 p.m. local time. Aluminum for immediate delivery settled at a $44.25 a ton premium to the contract for delivery in three months yesterday, the widest backwardation since Feb. 19, 2007. Today it traded at a discount of $10. The December contract’s premium over the January contract jumped as high as $73 a ton yesterday and today was at $45 a ton.
Backwardation signals limited supply. About 80 percent of the metal in LME-approved warehouses is locked in so-called financing arrangements, according to Barclays Plc.
“There are a lot of longs in the market because they want to take delivery for financing,” Bhar said. “You could call it a squeeze with the shorts obviously caught out. But they’ve had a lot of warning about the backwardation. It’s been flagged for many weeks if not months and the shorts have only got themselves to blame.”
The number of outstanding futures to be settled tomorrow fell to 65,432 contracts from 92,938 lots yesterday, according to exchange data on Bloomberg. One contract is 25 tons of metal. Financing deals are also known as rent deals.
“Backwardation will attract metal out of rent deals,” Jeremy East, global head of metals trading at Standard Chartered Plc in London, said by phone today. “I would expect to see some stocks coming back onto the market.”